Sony Ericsson disappoints

Sony Ericsson pleased the financial community with its results on January 16.

Handset shipments were 30.8m for the quarter, a rise of 19% on Q3 and 18% over the year. Average sale price rose slightly from Q3 to 123, but was down on the 146 from Q4 06, reflecting a higher share of lower-priced phones. Revenues were 3.77 billion, up 21% on Q3 but were down 0.3% over Q4 06. However, operating margin improved to 13% from 12.8% in the year ago quarter.

For the full year Sony Ericsson was proud to beat 100m shipments for the first time, posting 103.4m. Revenues were 12.9bn, up 18%, and operating profit was 1.54bn, an improvement of 23%.

Incoming president Hideki Komiyama said Sony Ericsson had gained 2% market share in 2007 and described it as 'a very good year" in which Sony Ericsson has positioned itself to capture further market share with an expanded product portfolio.

He estimated the handset market for 2007 to have been in line with their forecast of greater than 1.1bn units. He said Sony expects ate the market will grow by 10% in 2008.

Taken in isolation these are healthy results, showing that the company is delivering on its strategy of steady, profitable broadening of the portfolio into lower price tiers.

However, we think the volumes are a bit disappointing. Motorola handed its competitors a gift last year by losing more than 40% of its world market share - a lot of market share changed hands during 2007 and Sony Ericsson has not cashed in on that as well as Nokia, Samsung and LG have. 

More than that, through a combination of circumstances Sony Ericsson went backwards in Asia during 2007 with Q4 revenues down 18% on Q4 06. The ASP and margin rise in Q4 were partly due to successful high-end products in Europe, but also because of a relatively poor showing with its low-end devices.

Does this matter when the business is healthy‾ We think it does.

Opportunities to pick up market share relatively easily do not happen very often. Profitability relates strongly to volumes in mobile phones, so a large market share is a big help (provided you're selling profitably). Sony Ericsson has been prudent during 2007, but perhaps not aggressive enough.

Also Komiyama reminded investors that Sony Ericsson has been warming up for a big push into the US market during 2008 and is now confident that it has the designs needed to sell well, and the relationships with operators to enable that. He highlighted device and accessory launches at the Consumer Electronics Show in Las Vegas last week as the start of this.

There's no sign of any consumer slowdown in the mobile phone sector from Sony Ericsson's results, or Samsung's the day before. But, given the economic climate and weakening retail sales data coming out of the US, we think that 2008 is not going to be a great year for a big push into the US. Unless Sony Ericsson is gambling on Motorola getting worse and taking share from it - a highly risky strategy.

Sony Ericsson did say this morning that it is putting a lot of effort into re-building its position in Asia. We think that it would be prudent to give that very high short-term priority.

Martin Garner, Mobile Director at Ovum

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